Lawmakers Hear Suggestions for DB Plans

September 22, 2014 (PLANSPONSOR.com) – Making sure valuations are correct, addressing multiemployer plan problems and providing relief for closed plans were among suggestions made by witnesses for a hearing about defined benefit (DB) retirement plans.

Speaking
to the U.S. House Ways and Means Subcommittee on Select Revenue Measures, Deborah
Tully, director of Compensation and Benefits and Accounting Analysis at Raytheon
Company, which closed its DB plan to new employees beginning in 2007, urged
support for Subcommittee Chairman Representative Pat Tiberi’s (R-Ohio) bill to
provide relief for nondiscrimination testing for closed DB plans. H.R. 5381 liberalizes
the rules under which employers use cross testing for their closed plans, and allows
the benefits, rights and features that are available only to a closed group of
employees to be considered nondiscriminatory if they were nondiscriminatory at
the time the plan was closed. Similar legislation has been introduced in the
U.S. Senate.

Scott
Henderson, vice president of Pension Investments and Strategy at The Kroger Co.,
said his company has a different problem. As a member of several multiemployer
pension plans, it has been forced to take on liabilities for pension benefits
of employees of other firms that have exited multiemployer plans. Henderson contended, “There are two fundamental
problems with the multiemployer plan system, namely, withdrawal liability and
the last man standing rule.”

He
explained that when a withdrawing employer fails to pay its portion of the plan’s
unfunded liabilities—which often happens when employers file for bankruptcy or
go out of business—responsibility for funding the unfunded liabilities shift to
the remaining employers contributing to the plan. This is known as the “last
man standing rule.” The law requires withdrawing employers to pay a withdrawal
liability, but Henderson noted, even if they do pay 100% of the withdrawal
liability, investment losses on those assets would have to be made up by the remaining
employers. Henderson argued the last man standing rule can saddle remaining
employers with pension obligations for employees who may have worked for a
competitor or in a completely different industry than the remaining
employers—an unfair burden. He added that this rule discourages new employers
from entering multiemployer plans.

Henderson encouraged
lawmakers to consider proposals by the National Coordinating Committee for
Multiemployer Plans’ (NCCMP) Retirement Security Review Commission. In 2013,
the NCCMP suggested proposals that would strengthen the current multiemployer plan system, assist
deeply troubled plans, and encourage new plan designs.

Dale
Hall, managing director of research for the Society of Actuaries, argued that new mortality tables are needed for use in calculating DB plan liabilities, given American’s increased life spans. “We believe that it is critically
important for professional actuaries to have access to reliable and well-supported
data so that they can provide meaningful projections to the broad range of
stakeholders responsible for governing private pension plans,” he said. Hall
defended the society’s method for determining new mortality tables it proposed
earlier this year, which has been questioned by industry and employer groups,
and he confirmed that the society is still expecting to issue final tables by
October 31.

Jeremy
Gold, from actuarial consulting firm Jeremy Gold Pensions, claimed that pension
plan liabilities are underestimated by as much as 50%, and annual costs are
underestimated by as much as 100%. “Good policies cannot be based on bad
numbers,” he said. According to Gold, “unless accurate estimates of future cost
are on the table and open for all to see, the combination of benefits cuts and
employer costs will not reduce the deficit” of pension plans. He said the deficit
will only get bigger unless plan sponsors know the right price for all future
benefit accruals and make sure, at a minimum, these are paid, and the deficit
is accurately measured and plan sponsors decide how and when to fill the gap.

Gold
suggested “the concept of an independent consulting actuary putting a value on
these benefits is irreparably flawed.” He added, “The party setting the price
must have very significant skin in the game and capital at risk. The party that
sets the price must also guarantee the benefits and hold sufficient capital to
make good on its guaranty.” According to Gold, the party doesn’t have to be an
insurance company, but “they must combine capital, benefit guarantees and
actuarial expertise.”

In
a statement made for the hearing, the ERISA Industry Committee (ERIC) added to
these suggestions continued funding relief for DB plan sponsors. “These plan
sponsors need to be able to contribute more to their retirement plans when they
are financially able and obtain relief during the years when it is needed,”
ERIC said. It also recommended that lawmakers refrain from further increasing
premiums DB plan sponsors must pay to the Pension Benefit Guaranty Corporation
(PBGC).